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The Metamorphosis of ERP -- Are You Ready with the Right Strategy?

by Won Joon Hyoung | insiderPROFILES

April 1, 2011

According to Won Joon Hyoung, Managing Director of SAP Korea, a company’s overall IT strategy should consist of an ERP strategy together with a technology stack strategy. So how do companies set the right ERP strategy and keep it on track in 2011? This Q&A poses such questions to Hyoung, whose insights reveal important lessons and advice for SAP customers.

A Q&A with Won Joon Hyoung, Managing Director, SAP Korea

In 1990, Gartner defined “ERP” as the integration of many best-in-class solutions that served different parts of an enterprise. True to this definition, the vast majority of companies in Korea now actively leverage ERP systems for more than just finance and logistics. These systems are also the foundation for product development, sales and marketing, service delivery, production, supplier relationship management, compliance, and sustainability.

A company’s ERP strategy is a central tenet for value creation — especially now, with market conditions as they are. Get your strategy right, and your ERP platform fortifies your company’s offensive and defensive business postures. Getting it wrong raises risk exposure and barriers to value creation. The critical question for organizations that manage and set direction for ERP systems is this: How do we set the right ERP strategy?

insiderPROFILES posed this question to Won Joon Hyoung, Managing Director of SAP Korea, the ERP visionary who led the country’s first ERP implementation at Samsung Electronics in the mid-1990s. Author of the upcoming book Metamorphosis of ERP, Hyoung presides over the solution and services organizations for Korea, where more than 80% of the top 600 firms use SAP software. Specifically, we asked:

What factors are driving Korean companies’ need to get their ERP strategies on track in 2011?

What is the biggest barrier for customers trying to achieve a successful ERP strategy?

What can companies do today to ensure they’re on the right path?

Hyoung’s insights reveal a key lesson for readers: Now that the purpose of investing in information technology is to add value through the use of business applications, an ERP strategy, together with a technology stack strategy, should comprise a company’s overall IT strategy.

Q: Besides the obvious — difficult market conditions, the need to adeptly respond to new opportunities and change, and uncertainty with regard to currency — what other factors amplify a company’s need to get its ERP strategy right in 2011?

Many factors hail from the political or regulatory realm. Consider, for example, the green growth initiatives in Korea. The president himself went to Copenhagen and announced that Korea will be ahead of other developed nations in reducing carbon emissions by 30% by 2015. This announcement has triggered new legislation, and companies have accordingly established ambitious carbon targets. In fact, 470 companies have already been selected to submit those targets. You can expect government officials to demand visibility into the progress these companies are making. The right ERP platform is the most cost-effective way to comply, since it’s the logical platform to account for these types of activities.

Just as you naturally turn to an ERP system for financials, you can leverage it for carbon accounting and energy management as well. With the right ERP system and sustainability solutions on top, you can pull carbon information directly from your day-to-day business applications.

There is also mounting pressure on companies to provide transparency into business transactions — not just within a business’s enterprise, but across the length of its supply chain. The government is strongly encouraging OEMs to be more collaborative with their partners and drive economic benefit further down to supply chain participants. This push is poised to affect hundreds of thousands of suppliers. Again, your ERP system, with supplier relationship management solutions on top, should offer ample support for this collaboration.

And competition is undoubtedly a prevailing force. Market conditions and uncertainty don’t create a level playing field. Companies with analytics, alignment of employee objectives, and nimble, coordinated processes have the upper hand. They can cascade corporate objectives, monitor performance, change strategic direction with market shifts, or seize opportunities before competitors do. That’s the interesting thing about this economy. In all its uncertainty and shakeouts, it yields great opportunities. Take mobility, for instance: Korean citizens consume the most content from YouTube, aided in part by the proliferation of smartphones. Koreans have been trailblazers in social networking, too — the popular site Cyworld, launched in 1999 (five years before Facebook), reaches practically every South Korean in their 20s.

Q: What is the biggest obstacle that will prevent companies from executing the right ERP strategy this year?

The Plan-Do-Check-Act Cycle

Plan: Create an executable and globally optimized plan that accounts for all constraints.

Do: Execute as planned, with discipline and commitment.

Check: Detect anomalies faster, and analyze the root causes of problems. Make corrections on the spot, instead of changing the committed plans.

Act: Make sure that things go as planned.

For SAP customers, I don’t envision technical obstacles. (There may be internal hurdles, and I’ll get to them in just a bit.) SAP software is expressly designed to support “ERP” in the broadest sense, so you can easily leverage the software to address business, economic, and compliance factors. SAP customers have, by and large, moved past the historic ERP definition — a platform for financials and logistics — to the present-day definition, which encompasses product lifecycle management, customer relationship management, supply chain management, and supplier relationship management. These customers actively leverage ERP systems for plan-do-check-act (PDCA) cycles across lines of business and as a basis for innovation and competitive differentiation (see sidebar to the right).

By contrast, companies that took advantage of recent government programs to invest in ERP systems and went the non-SAP route are now stuck. Their technical barriers are considerable. They are unable to move past using ERP systems for accounting and inventory control, and therefore can’t address business prerequisites for real-time data, analytics, mobile applications, and business planning, let alone compliance and supplier collaboration. This is why most of these companies have migrated to SAP software in the last few years.

Another non-SAP route that could present hurdles is an in-house custom development approach. SAP’s portfolio of business applications is built on a platform that enables service-oriented architecture (SOA), and SAP delivers more than 3,500 enterprise services that customers can use to create their own best practices by combining them with their own services. Composition with this SOA platform is a more flexible, more agile strategy than custom development.

So, if SAP customers won’t encounter technical obstacles, what barriers to ERP success await them in the months and years ahead? They may be self-imposed. Mastering PDCA is a key part of the equation; setting the proper context is another.

In 2011 (and beyond), ERP customers need to recognize just how much consumer dynamics have evolved. I strongly advise them to take a hard look at this evolution. It used to be that purchase decisions started with a field of contenders. Consumers would then systematically whittle down their choices and select one based on product specifications, availability, and cost. Today, there is an additional dimension — an emotional one. Peers, product reviewers, bloggers, Twitter feeds, and social networks have tremendous sway. Failure to reflect this in your business and ERP strategies will prove an impediment to success in this new economy.

Sensing and acting on the emotional dimension of a market as well as your consumers’ relationship with your brands evokes images of the tango dance — where feelings flow back and forth to create harmonized movements based on careful attention to leading signals. With the right ERP strategy, this is precisely what you can do. You can get real-time insights into consumer sentiment and revise plans and actions accordingly. Your ERP platform can help you push and pull as appropriate, based on a very sensitive understanding of what is being consumed in real time (see figure below).

In today’s new era, “tango” is the desired state for production and distribution. Whereas a “pull” strategy still relies on standard SKUs, tango leverages customer feedback and context to make real-time responses with speed and mass customization.

No company has yet reached this level of sophistication, but we can get a sneak peek from what Samsung Electronics does today. Samsung reschedules its supply throughout the supply chain three times a day, touching on major parts, inventory locations, and transportation. With such an up-to-date schedule, a salesperson on-site in the US, for example, can confidently give an on-the-spot answer when a customer asks if a special order can be delivered in time for a holiday.

Samsung’s Japanese competitors, however, could spend weeks to get that answer: The salesperson on-site in the US would inquire about the availability of a product; the Japanese headquarters would check with the production plants in Southeast Asia; and the customer might not receive an answer until weeks later. This is a far cry from the tango way of production and distribution.

Q: What steps can companies take to ensure that their ERP strategy is on the right track and that it will serve them well in 2011?

I suggest that companies do the following:

Gain a mastery of PDCA across your lines of business. SAP customers have the means to plan, align that planning with execution, and tap into analytics for monitoring, root-cause analysis, and adjustments. Set a goal to move past the basics so that you don’t have to wait for the next plan, especially when benefit would be derived from more immediate action. You have the means to alter plans in tandem with market and consumer signals. This type of agility is embedded in your SAP solutions.

Take full advantage of the software you already have. There is a natural reluctance among users to embrace change and venture outside of their comfort zone. It’s management’s responsibility to look into these scenarios and determine their root cause. Management leadership is critical in getting employees to make full use of your software. On top of that, you can deploy mobile solutions and business analytics to help employees enjoy the benefits of the software you currently have in place.

Investigate cloud-based solutions, mobile technologies, and in-memory computing. Cloud computing is like an attack on the technology stacks that can (and will) be commoditized. Cloud-based solutions will help you trim costs and make your IT operations more efficient. However, you can leverage mobile technologies and in-memory computing to differentiate your business — by delivering better service to more participants much faster than before.

Address sustainability at a more aggressive level. Equating sustainability with just a passive investment to comply with regulatory mandates will leave you short-changed. Companies that take a more tactical approach to sustainability realize lower compliance costs and lower resource consumption, which is almost always accompanied by cost savings. Those that take a strategic approach often jump ahead of the competition, seizing more market share, customer and employee loyalty, and heightened brand value.

If you haven’t done so already, dispense with the narrow definition that equates ERP systems with finance and logistics. In addition to being a misnomer, this definition needlessly limits what you can (and should) be doing. An ERP system isn’t limited to accounting and inventory, or to processes within the confines of an enterprise. Leverage your ERP system to increase the value of your supplier, partner, and customer-facing activities — invite your partners to collaborate in order to generate more value for your customers. Think of the ERP system as a business process platform on which you can create your own practices in a more agile and flexible way to differentiate yourself from competition. While SAP offers out-of-the-box best practices, don’t shy away from creating your own. Wield your business process platform as a weapon for innovation and competitive differentiation.

If you set your company’s ERP strategy, you are the custodian of its enterprise resources. The right strategy not only optimizes the bottom line; it significantly contributes to top-line growth too.

Companies are increasingly realizing the enormous value that can be extracted from connecting people, products, and assets in a collaborative network that provides a real-time, operational view of the business....